Less than two weeks after DraftKings announced it planned to impose a surcharge on winning bets for wagers placed in New York, Illinois, Pennsylvania, and Vermont starting in January, the mobile sports betting titan announced Tuesday it is standing down.
The surcharge, announced by CEO Jason Robins on Aug. 1 as part of a letter to shareholders discussing quarterly performance, was met with stinging blowback on social media. Perhaps more importantly to DraftKings, one major sportsbook after another had either no immediate plans to follow DraftKings’ lead or outright rejected the idea. Flutter announced Tuesday during its quarterly earning call that FanDuel would not impose a similar surcharge.
Instead, Flutter plans on “moderating levels of generosity,” when it comes to marketing efforts in those states, CEO Peter Jackson said on Tuesday’s call.
Robins presented the surcharge as a way for DraftKings to claw back revenue in states with tax rates above 20%. The Massachusetts-based company, which pays 20% on mobile revenue in its home state, never announced a specific rate for any of the four states targeted, but it was believed it would be a percentage in the low-to-mid single digits depending on both tax rate and the ability to deduct promotional bonuses and credits.
The DraftKings CEO also opined transparency about the surcharge would potentially mitigate criticism, likening the surcharge to those found in the taxi and hotel industries. After social media took its whacks, however, financial analysts lined up for their say. Some stated the surcharge would provide a path for other operators to grab market share, others noted it would be “an expensive gamble” if other mobile sportsbooks didn’t follow suit.
That turned out to be the case. Rush Street Interactive, which operates BetRivers, said it would not impose a surcharge and even spent the immediate weekend after Robins’ announcement marketing off it. PENN Entertainment CEO Jay Snowden, whose company operates ESPN BET, said it had no plans to follow DraftKings during last week’s quarterly earnings call but did not rule out the possibility.
But like most everything that revolves around sports betting in the United States, it took the marketplace leader FanDuel saying it had no plans for a surcharge during its quarterly earnings call Tuesday to further isolate DraftKings before the proposal was rescinded.
As alternate means of generating more revenue to offset those high-state tax rates, DraftKings could lessen promotional offers for bettors, increase the vig on betting lines, or more aggressively market parlay and same-game parlay offerings since those wager types deliver substantially higher holds than single-event betting.
Paying Taxes Where the Surcharge was Targeted
The new progressive tax in Illinois, where new rates took effect July 1 was a key catalyst in Robins proposing the surcharge. Illinois Gov. JB Pritzker originally called to more than double the tax rate from 15% to 35% in February, but the proposal that created tiers starting at 20% and elevates to 40% based on revenue thresholds emerged late in budget discussions in May.
Based on its Fiscal Year 2024 numbers in Illinois, DraftKings would’ve paid taxes at the highest tier of 40% on $179.2 million of its $379.2 million in adjusted gross revenue. It would’ve been one of only two operators along with FanDuel projected to reach that tier.
DraftKings’ tax bill of $56.9 million for FY 2024 using its 2024 winnings would have more than doubled to nearly $132.7 million had the new rates been in place. Based on the timeline of when DraftKings wanted to implement the surcharge on Jan. 1, DraftKings likely would have been at or close to the $200 million in AGR threshold that triggers the maximum 40% rate entering 2025.
In New York, where the tax rate on mobile revenue is the highest in the nation at 51%, DraftKings paid $316 million in taxes for Fiscal Year 2024, which concluded in March. It has remitted $120.5 million for the first four months of FY 2025, and even a 5% surcharge on winning bets would have made a notable difference — DraftKings would have had $114.6 million in additional revenue, of which it would have retained $56.1 million after taxes.
The abrupt reversal caught a number of attendees by surprise at the Racing and Gaming Conference at Saratoga. DraftKings issued the statement at 6:12 p.m. when stakeholders attended a cocktail party at the Upstate New York event. One executive indicated that DraftKings risked losing the trust of customers by making a proposal, then immediately pulling it back. Another questioned whether DraftKings floated a “trial balloon,” wondering aloud if the company prepared “two separate press releases,” depending on FanDuel’s decision. The chatter also focused on whether a potential surcharge would have been brushed aside by state legislatures nationwide.
Pennsylvania, which has a 34% tax rate, likely would have seen a low surcharge since DraftKings is allowed to deduct promotional credits. Its AGR of $66.1 million in the first half of 2024 is nearly 71% of its $93.2 million in gross winnings. That resulted in $9.2 million less in taxes paid and put its effective tax rate in the Keystone State at roughly 24%.
The Vermont Liquor and Lottery does not disclose handle and revenue information by operator in its monthly reports, but DraftKings — one of three sportsbooks available along with FanDuel and Fanatics Sportsbook — is paying a 31% levy on its revenue, a percentage it submitted to the state agency during the bidding process to conduct business there.
